The Myths of the 1099-NEC forms

1099-NEC is a new form, as of the 2020 tax reporting year that has replaced some of the functions of 1099-MISC. 

The IRS requires you to report information about people who perform work for the church but are not on the payroll. This involves filling out Form 1099-NEC: Nonemployee Compensation.

Unlike the case for employees, employers generally do not have to withhold or pay any taxes on payments to independent contractors. These individuals keep track of their own tax obligations, oftentimes making quarterly estimated tax payments to the government. They fill out appropriate forms dealing with their earnings as part of their annual personal tax return.

While smart independent contractors meticulously keep their own records as to who paid them what, the law still requires official reporting. Thus, an employer must file a 1099-NEC for each person who is not an employee but to whom it paid at least $600 during the course of a year for services performed.

The penalties for failing to file 1099-NEC forms correctly and on time aren’t chump change anymore. Beginning with forms filed next year, the penalty for failing to file correctly is $50. That’s only if you manage to file the correct forms within 30 days of your mistake – penalties increase the longer you wait.

So now is the time to make sure you know the 1099-NEC facts and stay in good graces with the IRS.

Myth #1: Every independent contractor gets Form 1099-NEC

Reality: The only independent contractors who must receive 1099-NEC forms are individuals who do business in non-corporate forms. Examples include sole proprietorships, partnerships, or disregarded entities, or limited liability companies that don’t elect to be treated as corporations. In addition, you must have paid them at least $600 in cash for services they provided to your church.

Myth #2: Independent contractors who use the word “Company” in their letterheads don’t need to be provided with forms.

Reality: Using the word “Company” on letterhead, business cards, invoices, etc., isn’t enough to tell you whether they’re doing business in a corporate form. You need to go one step further and ask them about their business structure and have them complete form W-9. If they don’t tell you that they do business as a corporation, provide them with a 1099-NEC. Remember, you can never go wrong by providing too many forms, but you can be subject to tax penalties if you provide fewer.

Myth #3: Employees who do side work for their church always get 1099-NEC forms

Reality: The general rule is that employees should receive W-2 forms for all of their work for the same employer. Providing a W-2 form and a 1099-NEC form to the same employee usually piques the IRS’ interest.

Myth #4: The only forms that can be used are the official IRS forms

Reality: You may use substitute forms, provided they meet all of the requirements in IRS Pub. 1179.

Myth #5: Filing with the IRS satisfies state filing responsibilities as well

Reality: The Combined Federal/State Filing Program (CF/SF) was established to simplify information returns filing for payers. Through CF/SF, the IRS electronically forwards information returns (original and corrected) to participating states. But Form 1099-NEC isn’t among the forms that qualify for this sharing program. Consult IRS Pub. 1220 for more information.

Contact Clergy Financial Resources to help you with the next steps.

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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

For more information or if you need additional assistance, please use the contact information below.

Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (888) 421-0101 
Fax: (888) 876-5101
Email: clientservices@clergyfinancial.com